Copycat FTX? How serious are the 13 charges brought against Binance by the US SEC?

On June 5, 2023, the US Securities and Exchange Commission (SEC) filed 13 charges against Binance and its founder, Changpeng Zhao (CZ), including operating an unauthorized trading platform in the US, operating unregistered exchanges, broker-dealers, and clearing agencies, misusing customer funds, and issuing and selling unregistered securities.

The 136-page lawsuit filed with the federal court in the District of Columbia by the SEC details the illegal activities of Binance and Changpeng Zhao. In a statement, SEC Chairman Gary Gensler said, “Through 13 charges, we allege that Zhao and Binance entities engaged in wide-ranging deceit, conflicts of interest, lack of disclosure, and intentional evasion of the law. The public should be wary and not invest any hard-earned assets in these illegal platforms.”

Commingling Customer Funds, Money Laundering Billions of Dollars in Transactions

Similar to the charges against Binance’s former rival FTX and its founder Sam Bankman-Fried, the SEC accuses CZ and Binance of controlling customer assets, allowing them to mix and transfer customer assets at will, including transferring them to an entity called Sigma Chain, which is owned and controlled by CZ.

The complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (BAM Management) misled investors about the lack of transaction control on the Binance.US platform, while Sigma Chain participated in manipulating transactions, artificially inflating the volume of the platform. Between January 1, 2022, and June 23, 2022, Sigma Chain’s account laundered 48 of the 51 new listed cryptocurrencies.

In addition, the defendants mixed billions of dollars of investor assets together and sent them to another company, Merit Peak Limited, controlled by Binance founder Changpeng Zhao, apparently for the purchase and sale of cryptocurrencies.

CZ and its holding company reportedly control 100% of the various entities of Binance and Binance US, and the following is a diagram of the equity structure of Binance entities:

The SEC also claims that by 2021, at least $145 million had been transferred from Binance.US to Sigma Chain’s account. Another $45 million was deposited into the account from a Nevada trust company related to Binance.US, and Sigma Chain used $11 million in the account to buy a yacht.

It is worth noting that, similar to the opaque structure of FTX and FTX.US, the SEC said that Binance has access to Binance.US wallets and assets, as well as the custody tools and private keys of the US entity. At least until December 2022, Binance is also the designated custodian of any cryptocurrency assets deposited, held, traded, and/or accrued on the Binance.US platform. Zhao Changpeng signed multiple decisions related to trading services with the Binance.US platform, including customer onboarding processes, frontend access development, and creating reserves to pay ACH deposits.

The SEC is requesting the court to immediately verify Binance’s and Binance.US’s finances, freeze and return assets, preserve documents, and appoint a receiver for Binance’s assets.

Binance operating as an unregistered exchange

The SEC states: “As for the Binance.US platform, Binance and BAM Trading act as exchanges, BAM Trading acts as a broker, and Binance and BAM Trading each act as clearing agencies, without any registration.”

CZ is also accused of violating the Securities Act as “a controlling person” of Binance and BAM Trading. The filing states: “Under Zhao Changpeng’s leadership and control, Binance and BAM Trading illegally provided three basic securities market functions – exchanges, broker-dealers, and clearing agencies – on the Binance platform without registering with the SEC, defendants were acutely aware that US law required registration of these functions, but chose not to register, thereby evading key regulatory oversight designed to protect investors and the market.”

According to the filing, Binance’s chief compliance officer told a colleague in 2018, “Dude, we’re in the US a unlicensed security exchange.”

Avoiding regulation, soliciting US customers

Part of the SEC’s lawsuit refers to so-called “Tai Chi” documents, which Forbes originally reported on in 2020, which appeared to be a plan by Binance to formally exit the US market while still maintaining a presence through subsidiaries. Binance initially sued Forbes over the report in November 2020, then dropped the lawsuit in February 2021.

The lawsuit cites comments from Binance employees discussing methods of allowing US customers to trade on The filing quotes Binance’s CCO as saying, “On the surface, we are not allowing US users, but actually, we should attract them through other creative ways.”

The US Securities and Exchange Commission (SEC) said, “In fact, Binance has implemented most of the content of the Taiji plan, and Zhao and Binance maintain substantial participation and control over US entities, and behind the scenes, Zhao instructed Binance to allow and conceal many high-value US customers to continue to access”

The complaint stated that from June 2018 to July 2021, Binance’s revenue was US$11.6 billion, most of which came from transaction fees, and Binance.US operated its own over-the-counter trading counter, and its only trading partner was Alameda Research founded by FTX founder Sam Bankman-Fried for two years.

Selling unregistered securities, at least 12 tokens are securities

The SEC believes that the pledge investment products available on BNB, BUSD and Binance.US all count as unregistered securities. It also stated that BAM Trading’s pledge plan is an investment contract and falls under its definition of securities.

The document stated that Binance and BAM Trading were illegally engaged in the issuance and sale of unregistered cryptocurrency securities, including Binance’s own BNB and BUSD, as well as Binance’s profit plan BNB Vault and Simple Earn, and so-called “pledge” investment plans available on the Binance.US platform.

The SEC referred to 12 tokens as securities in the lawsuit, namely BNB, BUSD, Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos Hub (ATOM), The Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and Coti (COTI).

The SEC stated that the list is not exhaustive: “Since the launch of the Binance platform, defendants have been able to trade cryptocurrency on these platforms, which are provided and sold as investment contracts, and therefore also as securities.”

It is worth noting that the SEC did not list Ethereum as a security in the lawsuit. Blocking previously reported that SEC Chairman Gary Gensler refused to specify whether ETH is a security during a nearly five-hour hearing in April.

What is the SEC’s objective?

Binance was founded in 2017 and quickly grew into a leading player in the cryptocurrency field. According to data provider CCData, as of last month, more than 40% of cryptocurrency transactions were conducted through the Binance platform. This case has a wide range of implications and may reshape the power and wealth structure in the cryptocurrency field.

SEC and CFTC have been in a territorial dispute to determine who will be the primary regulatory agency for cryptocurrency trading. CFTC filed charges in March this year, accusing Binance and its founder Changpeng Zhao of violating federal law by offering unregistered cryptocurrency derivatives. Many of the charges in the SEC lawsuit are similar to those in the CFTC complaint, and for the SEC, this lawsuit is another major bet that US courts will agree that it has jurisdiction over the cryptocurrency industry.

In the lawsuit, the SEC seeks to stop Binance, Binance.US and “their respective agents” from continuing to violate federal law, demand that the defendants pay “all ill-gotten gains” and pre-judgment interest. Some optimists believe that this charge is a civil lawsuit and Binance may eventually settle with a substantial fine.

However, some believe that Binance may be permanently banned from entering the US market. The SEC mentioned in the documents that it hopes to prohibit CZ from serving as a senior officer or director of any issuer of securities, and to prevent Binance, Binance.US and CZ from participating in or trading any securities, including cryptographic asset securities. The lawsuit also states that this includes preventing the defendants from acting as unregistered brokers, clearing agencies or trading any cryptographic asset securities.

Both the CFTC and the SEC accuse Binance of failing to comply with US anti-money laundering laws, and the US Treasury Department, which is responsible for overseeing most of the US anti-money laundering system, has yet to respond. If Binance is suspected of violating sanctions, much of the evidence included in the civil lawsuit may be used to support separate enforcement actions by the Treasury and the Justice Department.

It is not yet known whether Binance can survive this crisis. Binance said it hopes that the US Congress will intervene and pass bipartisan legislation to establish a viable regulatory system for digital assets to prevent the cryptocurrency industry from becoming “a victim of bureaucratic overreach.”

Aaron Kaplan, co-founder of Prometheum, a digital asset security trading platform registered with the SEC and FINRA, tweeted: “The SEC’s meaningful action signals that the US is beginning to turn to regulated cryptocurrency market infrastructure, which should ultimately help the industry move forward. I expect this to result in net gains for US investors and should foster innovation.”

Author: BlockingBitpushNews Mary Liu

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